quotes:

"Most people are in arrested development and cannot use logic." Jacob."Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Saturday, August 11, 2012

Mises' Calculation Problem, in Simple Language, Part Two.

We'll slide into Part Two by pointing out some deep mysteries of prices and profits. Let's take them one at a time:Price. Why does something, a laptop, say, cost what it does, no more and no less? The answer is pretty obvious. The price is whatever the market will bear, meaning the more somebody wants that laptop, the more he is willing to pay for it. And a person wants that laptop because it of some use to him, whether for business or for entertainment purposes.

Now Marxists will say that the price of an object depends on the amount of labor put into making it. Old time economists will say it depends on the costs of making it. We won't go into that for now, because even the most stubborn Marxist and old time economist will agree that if a lot of labor and a lot of cost went into making a piece of garbage, nobody will buy it. So that satisfying the desires of the customer is certainly a consideration in what the final price is.

OK, so we'll go with that for now. The price of an object depends [partly or exclusively] on how much happiness it gives the buyer.

Profit. The Marxist will claim that profits come from ripping off the worker and paying him less than he deserves. We won't go into that for now, because even the most stubborn Marxist will agree that if you sell something for less than it cost you to make it, there won't be a profit. And the more you can lower the costs of production, the greater your profit will be. So that making something the most inexpensive way possible, the way that uses the least resources, the least means of production [that still gives you a product that the customer is happy with] is the most profitable way.

OK, we'll go with that for now. A bigger profit means you have made the customer happy using up the least amount of resources. And if you did not make a profit, that means you used up a lot of resources [high cost of production] to give the customer very little satisfaction [because we see he will only pay a paltry sum for it]. It makes him happy, but not THAT happy. In fact, if the resources were used to make something profitable instead of the expensive boondoggle that it did make, that means the customer would be made more happy, meaning the resources were used in a useful way and not a wasteful way.

OK, say the Socialists. We get that. Maximizing profit means making best use of the country's resources. A loss instead of a profit means the country's resources were wasted. So we, too, will maximize profit and minimize costs of production. So where's the doom?

The doom, says Mises, is staring you right in the face. Because how are you going to measure your profits, and your costs of production? One person [=the govt] owns all resources, meaning there is no buying and selling of resources, because one person owns them all already. If there is no buying and selling of resources, there can be no known price for them. If there are no known prices for resources, and thus no way of knowing what is the most efficient use of resources, no way of knowing if you are wasting your resources or using them wisely, you are doomed.

Here the Socialsts turn a little pale. They try to force a ghastly looking sickly smile on their stunned faces. Maybe we'll be lucky? Maybe, of the many hundreds of thousands of possible combinations of resources, we'll hit on one that is profitable [if we had a way of measuring it]. Hey, people win lottery tickets, at odds of ten million to one, all the time. Maybe we'll get lucky, too.